The Treasury today signalled it could be necessary for the Bank of England to print more money to deal with the threat of deflation.

With the British economy in recession and interest rates at an all-time low, the government fears the move could be necessary to stop inflation dropping below its 2% target.

Asked about the prospect of what is known in economic terms as quantitative easing – turning on the printing presses to literally print more cash – a Treasury spokesman said: "It would be prudent to consider all the options."

The decision to do so would be taken by the Bank of England, following consultation with the chancellor.

The spokesman added: "It is something the bank would discuss with us, and they have not done so, so far, but it is reasonable for everyone to be thinking about this with the low interest rates at the moment."

The spokesman said that, as with interest rates, the announcement would come from the Bank of England so the chancellor would not necessarily have to make a Commons statement on the matter.

"The chancellor wouldn't have to make a statement about it but it is something he would take a great deal of interest in," the spokesman added.

"Increasing the supply of money is one of the many policy levers the bank had to target inflation."

Asked at the Treasury select committee this afternoon about the prospect of "quantitative easing" if interest rates fell to 0%, the chancellor replied: "We will look at the situation when we need to."

"Interest rates have not fallen to zero yet," he said. "There is still some way to go."

Later, John McFall asked the chancellor directly about this news story, Darling said he was "aware of the report" but insisted that while interest rates were still at 2% that no decisions had been taken.

"It's not something people should get too exciting about," he said. He did, however, confirm that the Bank would have to consult with him before taking a decision on the matter.